Why are restrictive covenants important in sale and purchase of businesses?

The recent case of Millen v Karen Millen Fashions Ltd & Anor, is an important reminder for all companies who are selling their business to consider any restrictive covenants in the sale and purchase agreements.

The facts

In 2004, Karen Millen (the Claimant) sold her stake in her clothing business, Karen Millen Fashions Limited, to Icelandic group Mosaic Fashions. The share purchase agreement (SPA) included restrictive covenants that restricted the Claimant from using any of the Karen Millen Holding Group’s intellectual property rights in the course of any business, around the world; and restricted her form using her own name, ‘Karen Millen’ or anything similar, in relation to any business.

Several years after the sale of Karen Millen Fashions Limited, the Claimant decided to open a new business under her name in relation to homeware in a number of jurisdictions, including the US and China. As a result, trade mark disputes arose in the US and China over marks containing the words ‘Karen’, ‘Karen Millen’, and ‘KM’.

In 2014, the Claimant applied to the High Court for relief, including negative declarations to the effect that certain activities, including using the business names ‘Karen Millen’ for homewares and ‘Karen’ in respect of any goods or services, would not breach the SPA.

The High Court rejected the Claimant’s application on the grounds that according to UK case law, negative declarations can only be granted where the underlying issue is clearly defined. In this case, the court found them not to be clearly defined in the SPA.

Comment

For those businesses who are selling or acquiring brands, this case is an important reminder of the importance of preserving rights in the use of names associated with relevant brands. Where a brand has carefully built up goodwill, a decision to transfer over extensive rights in relation to the use of the brand name must be carefully considered.

If you are considering selling your business, it is important to carefully consider the terms of the agreement and to ensure that restrictive covenants are not too restrictive as in the Millen case.

Finally, this case also highlights the value of brand names and how businesses should choose their brand name carefully. It is also a helpful reminder of the powerfulness of trade marking your brand name to stop others from using a similar or identical name.